Selling short

68  Sell short

Recently there are big losses for shorting Netflix and Tesla. I still do not like Tesla and they can only succeed depending on the $10,000 subsidy or rebate from the government for each car they sell.

Shorting is better to be avoided for most:

·         Could lose more than 100% of the investment.

Actually, in theory, there is no limit. If the shorted stock price rises by 10 times, the loss is well over 10 times money invested.

·         Need to pay dividends and interest for the shorted stock.

The higher the dividend rate for the stock, the more you have to pay. The experienced would avoid high-dividend stocks to short.

Need to pay interest for ‘borrowing’ the stocks to sell. Brokers charge interest rates differently and it could be a huge saving to shop around if you short stocks a lot.

·         Need both fundamental and technical analyses.

From my experience, a technical analysis is more important in shorting.

·         If successful in shorting, gains are subjected to the short-term capital gain taxes which are typically higher than long-term capital gain taxes.

·          Not all the stocks can be shorted.

·         Selling short is not allowed in retirement accounts as of 2013. However, you can buy contra ETFs for a group of stocks to bet against the market or a sector, but not on a specific stock.

·         The following sectors are riskier: the drug, mine, bank (unless you know the quality of mortgages) and insurance sectors. A single drug approval could drive the stock price up by more than 25% in one day.

·         There is no perfect timing. Some stocks fluctuate a lot with no rational reasons. Some stocks may be manipulated.

·         Watch out for short squeezes when the short percentage approaches over 30%. In a nut shell, the stock is running out of shares to be shorted. As a result, it would rise in price especially on any good news.

Using put options is similar to shorting a company with more advantages than disadvantages.

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My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 105 and some important chapters will not be included in the blog.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.